The state's largest health insurer, Blue Cross and Blue Shield of Maryland, has asked insurance regulators to approve the insurer's attempt to appraise one of its subsidiaries and use the new value to boost its lagging reserves.
Blue Cross wants to set the value of the unit, Green Spring Health Services Inc., on the basis of a 20 percent stake it sold last month to Blue Cross of Western Pennsylvania.
If Blue Cross is permitted to use the newly appraised value, it would add to the company's assets and boost its most recently reported reserve level of $72 million by about 16 percent.
But John A. Donaho, the state insurance commissioner, has raised objections to the plan on a number of grounds and is seeking a legal ruling in the matter.
Reserves are the amount of assets an insurer has in excess of current medical claims and other liabilities. Blue Cross President Carl J. Sardegna predicted last week that the company's reserves could grow to $100 million this year, in part by counting the value of subsidiaries and including it in the reserves.
Last month's transaction was the first time the insurer has sold a minority interest in one of its subsidiaries. Such sales are rare among Blues plans nationwide, according to a spokesman for the Association of Blue Cross and Blue Shield Plans, a national trade group.
The question of Green Spring Health's appraisal could shape a second plan before regulators in which the Blues have proposed creating a new subsidiary that would serve as a holding company for three of its health maintenance organization units. The company would then seek to sell part of the new entity to private or public investors.
Blue Cross officials hope to raise cash by selling 20 percent of the proposed new company, but they say another reason for the sale is to establish a price that could be used to value the remaining 80 percent of the subsidiary on its balance sheet. The valuation could add tens of millions of dollars to Blue Cross' reserves, insurance officials estimate.
The insurer reported $72.4 million in reserves as of March 31, about $44 million less than what industry experts say is optimal for the amount of premiums Blue Cross writes each year.
The level of reserves compared with its annual business was one of the factors considered by a private firm, Weiss Research of Boca Raton, Fla., in rating the Maryland Blues "weak" last month.
Blue Cross sold the 20 percent stake in Green Spring Health, a for-profit unit, for $3.8 million. The price was based on an evaluation by Legg Mason Inc., said Green Spring's president and chief executive officer, Paul G. Shoffeitt.
Mr. Shoffeitt said Legg Mason estimated the total value of Green Spring Health, which operates outside Maryland, at $19 million. The company is separate from Green Spring Mental Health Services Inc., which operates exclusively in Maryland and continues to be fully owned by Blue Cross and Blue Shield of Maryland.
But state regulators question whether the sale to another Blue Cross plan is a fair test of the price the subsidiary would fetch on the open market.
"Does it make a difference in that instance that the purchaser was another Blues plan?" is one of the questions the state attorney general has been asked by the Maryland Division of Insurance, said Jack Schwartz, chief counsel for opinions in the at torney general's office.
Green Spring Health, based in Columbia, specializes in the management and delivery of psychiatric care and substance abuse in six states. In addition to setting up networks of doctors to provide such care, including some in other Blue Cross-owned health maintenance organizations outside Maryland, it reviews employers' bills for alcohol-abuse and drug-abuse treatment with the goal of ensuring appropriate treatment at the lowest cost.
Although Blue Cross declined to provide financial statements, Mr. Shoffeitt said Green Spring Health's national operation is highly successful and has returned to Blue Cross "five to 10 times" the parent company's initial investment. He said it is one of the 10 largest such companies in the country.